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Monthly Archives: March 2013

Carol O’Riordan and Pam Bethel, two of our awesome Directors will be attending next week’s DMBE Conference on creating more access to business opportunities for small business. We are excited!

Brought to SWaM and DBE Firms, The Access to Opportunity Conference: Creating a Cornerstone for Change is been organized by the Virginia Department of Minority Business Enterprise with the City of Hampton and Hampton University. For one day, you will have to will:

Talk to representatives from regional government agencies and businesses

Learn how to bid for state and local government contracts

Discover strategies for success and business growth in 2013

The Conference next Tuesday, March 26th from 8 am to 5 pm at Hampton University in Hampton, Virginia. If you are looking to get in contact with potential partners and potential buyers, this is going to be the place to be. Thanks to DMBE and its partners, attendees will have the opportunity to attend training session with VDOT, VASCUPP and be part of Business Matchmaking sessions based on their specialties.

For those businesses trying to access capital, there will be numerous bank representatives there to speak with you and help better position your company.

Admission is only $50 and you need to register ahead, so don’t wait and visit http://www.dmbe.virginia.gov to fill out the registration form.

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This week WCC President Laura Rojas traveled to the People’s Republic of China, where she assisting a company’s efforts to export its products to the the Asian nation.

WCC is helping this company understand and navigate the Chinese regulatory process, fulfill the license requirements, and understand the Chinese market, in order to sell and market its products in China.

With an economy that was expected to grow by 7.9 percent in 2012 and a market expected to increase consumption activities from approximately 35 percent of GDP in 2010 to 50 percent by 2015, entering the Chinese market is a great opportunity for American business trying to expand globally. WCC has contacts and experience dealing with the Chinese regulatory framework that can help your business!

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The Fiscal Policy Institute’s Immigration Research Initiative released a report on Immigrant-owned small businesses last year. Among the topics the report focused on was the growth of immigrant-owned small businesses, what factors influence the likelihood that an immigrant will become a business owner, and some of statistics about small immigrant-owned small businesses.

Of the 4.9 million of small businesses in the United States, 4.9 million or 18 percent are immigrant-owned. From 1990 to 2010 immigrant-owned small business accounted for 30 percent of the overall growth of small businesses.

The overall rate of small business ownership for immigrants is very similar to that of US-born, 3.5 and 3.3 percent, respectively. Business-ownership differs greatly among immigrants. For example, Greeks only make a small part of immigrants but 16 percent of Greek immigrants in the labor force are business owners. The length of time immigrants have lived in the US also affects their likelihood of becoming business owners- those who have been in the states for longer than 10 years are more likely to own a business. For Indians, for example, only 2 percent of the recently arrived owned a business compared to 9 percent of longer-established immigrants.

Education levels between foreign-born and US-born small business owners is not very different; 58 percent of small business owners do not have a degree while 56 percent of US-born do not have one either. As one would image, levels of education do affect the likelihood of owning a business.

In metropolitan areas, where the larger populations of immigrants can be found, immigrants are 10 percent more likely than US-born workers to become small business owners. With 45 percent of its immigrants as business owners, the Miami metro area has the largest share of immigrant business owners. Among the states (plus DC), California has the highest concentration of immigrant business owners (33 percent).

Despite the assistance that immigrant-owned businesses provide to the economy, immigrant small business owners earn 16 percent less than US-born small business owners- with the exception in education, health and social services, where foreign-born doctors push up the earnings.

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While the largest economies came to a screeching halt in 2008, and have since then, began a slow trek, the Chinese government responded quickly to the economic crisis with a combination of monetary, fiscal and bank lending measures that protected its economic growth. The following year, when the majority of countries were seeing negative or low single digit growth and the US saw a negative growth of 3.9 percent, China’s Growth Domestic Product (GDP) grew by 9.2 percent, 10.3 percent the following year and 9.2 percent last year. In 2012, the Asian nation’s GDP was expected to grow by 7.9 percent, and estimates show projected growth for next year of between 8.3 percent and 8.8 percent. During those years, the United States saw 3.0 percent growth in 2010 and 1.7 percent growth in 2011. This year the large American state is expected to see growth of around 2.3 percent and 2.6 percent next year.

The Market:

According to China’s 12th Five-Year Plan (12th 5YP) that came out in 2011; the country will increase consumption activities from approximately 35 percent of GDP in 2010 to 50 percent by 2015. The current percent of 35 is low when compared to the United States and Brazil, where consumption activity makes us 70 and 63 percent of the GDP, respectively.

After Canada, China is the US’ largest trading partner. In 2010, American firms exported more than $91 billion in products to China. American exports of agricultural goods, fishery and forestry from January to December 2011 reached a new high of $21.9 billion, an increase of 13 percent from the previous year. Estimated rise in Chinese income and demand for raw materials and finished foodstuffs are expected to result in an increase in imports. Currently, Chinese buyers 45 years or younger makes up 80 percent of the people buying luxury goods, and by 2020 China’s middle class is expected to expend to 45 percent of the population. By 2015, the Chinese people will account for 20 percent of the consumption global luxury goods, or $27 billion.

Foreign Direct Investment:

China’s outbound FDI rose 14.1 percent from 2010 to $46.3 billion in 2011. To the United States Chinese FDI is expected to reach 12 billion in 2012. Inbound FDI reached $95 billion, a 16 percent increase during the first three quarters of 2011, and an overall 15.9 percent incline from the previous year.

While the government can restrict investment in certain areas, it is currently seeking to develop high technology research and development, advanced manufacturing and clean energy technology. Foreigners wanting to invest in projects that include the transfer of technology will be especially well received.

Stumbling Blocks:

Foreign companies wanting to do business in China should expect to face some difficulties, including lack of predictability in the local business environment. China’s legal and regulatory system is known for being inconsistent and laws can be exercised arbitrarily. The lack of effective laws protection intellectual property rights is especially worrisome for many American companies. The government regulates and dictates several sectors of the economy and protects local firms, especially state-owned enterprises, from foreign competition.

Foreign investors too worry about China’s willingness to offer them a level playing field. The current investment climate includes industrial policies that protect and promote state-owned and other domestic firms.

The Chinese legal and regulatory framework allows it to promote investment in specific regions or industries it wants to develop and restrict foreign investment in areas it considers counter national interest or might compete with state-condoned monopolies or other favored domestic firms. Recently, the government let it be known that it will restrict foreign investment in resource-intensive and high-polluting industries, i.e. basic manufacturing. Additionally, it will also discourage FDI in sectors: 1) where it is working to develop domestic firms into global competitors; 2) that are considered state-condoned monopolies; or 3) deemed important for social stability. Finally, it also deters investment intended to profit from currency, real estate, or asset speculation.

Recently, the Washington Business Journal and HSBC sponsored a conference, Business Without Borders: Doing Business in China, which featured Craig Allen, Deputy Assistant Secretary for Asia, Assistant Secretary for Market Access and Compliance, United States Department of Commerce; Martha Lacrosse, Director, ExportDC, DC Department of Small and Local Business Development (DSLBD); and Andrew Sherman, Partner, M&A and Corporate, Jones Days law firm.

Here is a summary of what they shared that might be interesting to those businesses thinking of expanding to the Chinese Market.

Be prepared to do your due diligence. When thinking of entering the Chinese market; be prepared to invest and to spend a lot of time gathering information before beginning. While you may already have a business plan, you MUST create a China Business Plan that includes, among other thing: who is going to China? What does that person know about China, the culture and doing business there? What sectors will you focus on?

Also, have an immigration plan. While the Chinese are the biggest users of EB-5 Investors Program green cards, entering their country requires jumping through multiple hoops, including an invitation.

Be prepared for cultural differences. While the United States has a fast pace business environment, the Chinese are not fast when it comes to making a final business decision—BE Patient. If you cannot be patient, then you may want to find a different market. Creating a relationship takes time because in general, when compared to the United States, China is a low-trust culture.

Rituals are very important as are introductions. When business cards are exchanged, the Chinese usually hold the card with both hands and take the time to study the card to really know who they are speaking to. They want to know how high you rank because to them hierarchy is very important. Decision-making always takes place at the very top.

A good way to strategically enter the market is by first doing business in more trusting neighborhoods like Hong Kong, Taiwan, Singapore or Shanghai.

When debating whether to attempt entering the market, measure opportunity versus risks. One of the biggest risks you will face is the unpredictable law system. In China, laws are broad ethical statements that are implemented by local officials. The western region market is especially difficult to enter and is known to be more corrupt than the east. The east region has better infrastructure and officials there are known for interpreting the laws more similarly.

But whether you enter the east or the west region first, you should have good relations with two of the three following groups; the local government and its party officials, the provincial government and its party officials, and the central government and its party officials. You need a good relationship with at least two of these three because the probably of you needing them to introduce you or speak on your behalf to the third party is high.

Be prepared to make changes. When you are trying to gain entry into a new market also remember to customize your product. While in the United States we think getting a three scoops of ice cream for the price of two is a deal, other cultures do not necessarily appreciate our extra-large portions. Customizing your product might mean changing its price, which leads to change in business dynamic, which might require a change in business strategy.

By 2015, the Chinese people will account for 20 percent of the consumption of global luxury goods, or $27 billion. Still, just because China has a 1.3 billion-size market does not mean that every buyer has the same buying power. For more on the Chinese market read our October 5th post The Chinese Market and Its Economy.

Be prepared to protect your IP Rights because the government will not do it for you. Laws are not predictable, especially in the technology field. The concept of Intellectual Property laws is very new; China’s first patent law was just created in 1984 and has since then been amended four times because its goal is a moving target. IP rights are personal laws that do not belong to the US government. When I say they do not belong to the US government, I mean that while the US government may want to help you it cannot force its Chinese counterpart to protect your IP rights. Services to register your IP are available but that is not enough so DO NOT sell your crown jewels, sell products of lower quality, those that you can risk losing.

When dealing with IP, always do your due diligence.

Register your Trademark/copy rights;

Record your Trademark/copy rights with US customs; and

Learn what protections are available.

If you find out your IP rights are being violated, DO something about it, DO NOT expect the government to do it for you. While the US government cannot directly protect your IP rights, it can help you find legal advising.

As for FDI, the Chinese system allows its government to promote investment in specific regions or industries it wants to develop and restrict foreign investment in areas it considers counter national interest or might compete with state-condoned monopolies or other favored domestic firms. As a result of the government’s efforts to move into a more value-added economy, it recently announced it will restrict foreign investment in resource-intensive and high-polluting industries, i.e. basic manufacturing. Additionally, it will also discourage FDI in sectors: 1) where it is working to develop domestic firms into global competitors; 2) that are considered state-condoned monopolies; or 3) deemed important for social stability. Finally, the government also deters investment intended to profit from currency, real estate, or asset speculation.

Be prepared to ask and answer tough questions. Because, as mentioned before, understanding the culture is important and having the right introduction is vital, you will most likely have and need a Chinese counterpart. Whether your boots on the ground is a distributor, an agent, or a partner you will need to ask about its finances, its general capabilities, its other business arranges, and, if you are worry about your IP rights, technological capabilities.

Do your homework when deciding on who will be your distributor, agent or partner. The reality is that while you, as an American, are used to moving quickly to do business and trusting your potential distributor/agent/partner does will not reach the same level of trust as quick.

If you are a small business you need to know that your Chinese counterpart will not leave you hanging when you need to make Friday’s payroll. Will marketing costs be divided? Are they willing to have a stake on whether you succeed or fail?

Ask whether your distributor/agent/partner has a strategy: benchmarks of expected sales, how will they sell your product? How much access to the market do they have? Are they representing competing or complementary products?

Exclusivity means nothings and signed contract may just be a paper that gets filed and forgotten.

If you are an IT firm and at any point your distributor/agent or/partner says it has high reverse engineering capabilities, you should take a step back and either run for the hills or re-access your options.

Just as you struggle to decide whether the partnership will work for you, your Chinese counterpart will also access whether it will be convenient for him/her. Some of the things he/she will take into account are: Is your product/service of quality? What are your short, medium, and long term goals? How well did your product do in the neighboring markets such as Taiwan or Hong Kong or Singapore? Are you flexible and do you have the capacity to grow if needed?

They will ask you these and many questions because just like you they know the size of the Chinese market and want to do business with someone who can expand and develop accordingly.

Finally, while they will not ask you, they will determine whether you respect their culture and whether you were properly introduced.

Other Things to Know.

The rewards for successfully entering the Chinese market are great. China is the shining star of the BRIC nations; it is developing fast, investment is increasing daily, infrastructure development is advancing quickly, the size of the market is massive and its luxury goods market is quickly overtaking Japan’s. (By 2017, it will become the second largest luxury goods market after the United States). Get in early when you have less western competition!

The DSLBD now has an office in Shanghai and can help you create partnership by providing you with the proper introduction. It also organizes trade mission and sets up meetings on your behalf. DSLBD is currently focusing on the green technology and infrastructure sectors.

To get pay you can either work with one of the banks in the DSLBD network or through the Ex-Im Bank. HSBC also has offices in China and can help in the process of sending and receiving money.

China has yet to join the World Trade Organization’s Agreement on Government Procurement; therefore, its governing laws are not considered “best practice.”